State tax reforms on the table for 2013 Legislature

ST. PAUL, Minn. -- Tax reform is high on Governor Dayton's to-do list for the 2013 legislative session.

One goal is to create more long-term fiscal stability for state government, and another is to strike a better balance between the three major forms of taxes used to finance services taxpayers expect.

"I think that the real goal here is to make sure that the taxes are spread equitably across the state," Sen. Rod Skoe of Clearbrook told KARE, "so we can be one Minnesota and everybody can have some chance of success."

Skoe, a Democrat who first came to the legislature in 1998, will chair the Senate Tax Committee in 2013 now that the DFL has recaptured the majority in that chamber.

He said he expects leaders will be cautious approaching the complex tax code, given that there are many first-time lawmakers in both chambers who will have some catching up to do.

Revenue Commissioner Myron Frans said that Governor Dayton has asked him to explore the idea of eliminating some of the state's sales tax exemptions, as part of a package that would lower the overall rate.

"How can we expand the sales tax base and lower the rate in a way that the citizens of Minnesota would say, 'That's a fair trade-off'," Frans explained.

"By expanding the tax base we get rid of these unusual distinctions between one kind of service and another kind of service. and one product and another product, and we make things more simple."

Frans now travels with two colorful three-legged stools to demonstrate his point that the tax burden is out of balance compared to a decade ago. He asserts that state and local governments are relying too heavily on property taxes, relative to sales and income taxes.

One stool, representing 1999, can stand because the three legs -- symbolizing sales, property and income taxes -- are nearly the same length. In that year property taxes funded 30.4 percent of all government services in Minnesota, as opposed to 34.8 percent for income and 34.7 percent for sales tax.

The other stool, representing the tax split in 2010, can't stand on its own. In that year property taxes accounted for 39.8 percent of all money collected by government in Minnesota. Income tax was relatively the same as a decade earlier, at 33.6 percent, but sales taxes had dropped to 26.6 percent of the total.

"We think that's an unequal distribution in the overall society and in our economy," Frans explained.

"We would like to see things smoothed out so that those revenues, those three sources of revenue, are distributed fairly around the entire economy."

Those who've made a point of researching tax trends and policy say overhauling the code is much easier than it sounds.

"Tax reform under any circumstances is going to be difficult to do because you're by definition going to be creating winners and losers," Mark Haveman, executive director of the Minnesota Taxpayers Association, told KARE Monday.

"Tax reform that actually increases the revenue stream makes it even more challenging, because not only are you creating winners and losers but you're adding burden to someone as well."

Haveman's group, the oldest tax policy think tank in the Minnesota, tends to tout reliance on property taxes for a variety of reasons.

"Our effective property tax rates are in the middle of the pack nationally. Our collections are below the national average," he said.

"We have a fantastic refund program in Minnesota that provides direct, targeted relief, specifically on the ability-to-pay problem."

Haveman said the unbalance three-legged stool is partly a reflection of the huge dips in sales and income caused by the recession.

"In the Great Recession, income and sales tax are on the decline, so property tax by its very nature will pick up tax share," he explained.

"And we should be celebrating that in some respects, because it provides some badly needed fiscal stability."

He said the Minnesota Taxpayers Association also appreciates the transparency of the property tax process.

Individual taxpayers get to see the exact tax increases local governmental units are proposing before the final vote, and are offered the opportunity to weigh in on those proposed levies.

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